Since 2018, the Shaw & Co Business Funding team has been in continuous discussions with numerous teams of Relationship Directors (RDs) and Business Development Directors (BDDs) from major UK banks regarding the use of alternative funding markets to fill the SME finance gap between bank credit policy and client funding requirements.

The colloquially known ‘Gap Capital’ has enabled a host of RDs to not only solve client funding gap requests that fall outside the bank’s usual credit appetite, but to win new-to-bank clients with funding requirements that would usually be judged as ‘Too much too soon’. Crucially, existing clients are retained, and new clients are re-banked with any ‘excess’ funding risk outsourced to the alternative market.

This creative approach to the SME finance gap offers another robust tool for RDs and BDDs seeking to solve a range of funding problems. We’ve produced a checklist of the specific ways Gap Capital can help your SME clients…

1) Insufficient bank credit appetite to accommodate all the funding request

As tolerable leverage is higher amongst funders in the alternative markets when compared to traditional high-street lenders, they can be used for gap capital to top-up any available funding from the major banks. We can help arrange the additional capital, leaving the bank within its credit tolerance, while providing custom for the incoming alternative lender – a truly win-win-win situation.

2) Client needs a non-amortising or a partially amortising loan

SMEs wishing to fund growth typically prefer to retain capital within the business for internal investment, as opposed to paying the sizeable capital amortisations required on a bank straight-line repayment loan. Alternative gap capital debt can be much more flexibly sculpted around the cashflow plan of the business, and these fully non-amortising ‘bullet’ loans are common.

3) Fast growing client, but insufficient record of profitability

Some clients have earnings growing rapidly towards breakeven and are already showing a strong trading EBITDA within the next 6-12 months. A BDD at a traditional bank, however, cannot pick up the business until there has been a strong proven EBITDA of around two years.

Nevertheless, the bank can still win such a client, their clearing, ancillary income, deposits etc, while outsourcing any initial gap capital funding requirements to the alternative market. Then, in 18-24 months’ time, when bank account history and financial reporting has been established, showing a clear refinancing case, the client is then not only loyal to the bank for believing in them, but also has a natural incentive to refinance and bring down the cost of capital from the alternative lender to the cheaper traditional bank interest rate.

4) Earnings composed of items (e.g., R&D tax credits) falling outside credit policy

Non-standard components of EBITDA, such as R&D tax credits within IP (Intellectual Property), may be outside more stringent bank credit policies, but entirely acceptable to the alternative market in terms of gap capital.

5) Lacking or insufficient tangible asset collateral cover

Lending that is not covered by tangible asset collateral tends to be a challenge for banks, whereas alternative lenders are much more accustomed to lending against a debenture, or even being unsecured. Thinking laterally opens-up many high-IP businesses and even sectors with a leasehold property structure (nurseries, assisted living/acute care facilities), where gap capital can provide a vital bridge.

6) Contract nature of revenues

Businesses that have revenues that are contractual in nature typically struggle to raise long-term funding, as they are perceived as being of higher risk by banks. Searching for alternative lending gap capital solutions that can be more flexible, or searching for specialist lenders that are more able to understand more exacting borrowing requirements, is therefore highly important.

7) Clients wishing to fund overseas acquisitions

SMEs looking to grow internationally need to first establish good relationships with traditional banking partners in the UK, and then overseas. Building relationships with UK banks which have both the ability and bank counterparties in overseas territories is critical, along with an understanding of the risks involved of trading in overseas territories, understand currency risk, translation risk etc. Nevertheless, traditional banks may not be able to fund large-scale overseas acquisitions on their own, and so gap capital may be required to bridge that gap.

8) Unwelcome sectors – Restaurants, Construction, Oil & Gas

Recent years has seen many crises - Covid, the Ukraine war, spiralling inflation, cost-of-living crisis, and now the banking crisis. All these events shape the banks’ appetite, determining which sectors they will or won’t support. The financial crisis heralded a substantial change in bank appetite towards more asset-based lending, and this is a continuing trend. We can help to find gap capital solutions from alternative lenders for sectors that have fallen out of favour.

Alexei Garan is a Partner - Business Funding at Shaw & Co

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If you'd like to discuss how Shaw & Co can help you sell, buy or fund the growth of a business, please book a meeting here